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HE 013 129

Allen, Richard H.: Collier, Douglas J.Nigher Education Finance Manual: Volume 3. TheSourte/Use Concept.National Center for Higher Education ManagementSystems, Boulder Colo.National Center for Education Satistics (DHEW),Washington, D.C.80300-76-031936p.: For related documents see HE 013 132-133.National Center for Higher Education ManagementSystems, P.O. Drawer P, Boulder, CO 80302

MF01/PCO2 Plus Postage.*Accounting; Data Analysis; Da.a Collection:*Educational Finance: *Expenditures; Guidelines;*Higher Education; Income: Matrices; Models;*Recordkeeping: School Funds: Specifications:

Standards: Statistical Data

ABSTRACTThe third volume of the revised "Higher Education

Finance Manual," this guide describes the principles included inpresenting financial information in a format showing where moneycomes from (sources) and. where it goes (uses). Potential analyticalapplications and limitations of the source/use concept are described,and the application of the standard source/use matrix as asupplementary financial statement and communication tool is examinedin detail. Iuplementation of the source/use concept in terms ofcollection, compilation, and formatting of data for the standardsource use .matrix is also addressed. It is suggested that thesource-use ccncept should be viewed as a way to format data andanalyze institutional finances, rather than as a specific financialstatement. It shows the relationship between the expenditure cfinstitutional monies and the sources of funding for thoseexpenditures. The standard source/use matrix describes current fundoperations and expandS the "statement of current funds revenues,expenditures, and other changes" by relating particular sources offunds to particular uses. It provides a one-page summary of currentinstitutional, financial affairs. (SW)

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Volume 3:Higher Education Finance Manual:

1

I 5

National Center for Higher EducationManagement Systems

U S DEPARTMENT OF HEALTH,EDUCATION & WELFARENATIONAL INSTITUTE OF

EDUCATION

THIS DOCUMENT HAS BEEN REPRO-DUCED EXACTLY AS PECEIVEO FROMTHE PERSON OR ORGANIZATION ORIGIN-ATING IT POINTS OF VIEW OR OPINIONSSTATED 00 NOT NECESSARILY REPRE-SENT OFFICIAL NATIONAL INSTITUTE OFEDUCATION POSITION OR POLICY

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The mission of the National Center for Higher Education Management Systems (NCHEMS) is to carryout research, development, dissemination, and evaluation activities and to serve as a national resource toassist individuals, institutions, agencies and organizations of postsecondary education, and state andfederal governments in bringing about improvements in planning and management in postsecondaryeducation.

BOARD OF DIRECTORS

ChairpersonRobert LisenskyPresident,Willamette University

May BrodbeckVice President for Academic Affairsand Dean of the Faculties,University of Iowa

K. Patricia CrossDistinguished Research Scientist,Educational Testing Center

Thomas DayPresident,San Diego State University

Henrik DulleaAssistant Secretary to the Governorfor Education and the Arts,State of New York

Richard GreenfieldChancellor,St. Louis Community College District

Dorothy Harrison-BlaneyDeputy Commissioner,New York State EducationDepartment

Henry HerzingPresident,Herzing Institutes, Inc.

T. Edward HollanderChancellor,Board of Higher EducationState of New Jersey

Chairperson-ElectNeil BucklewProvost,Ohio University

Hans JennyVice President forFinance and Business,The College of Wooster

Thomas LawPresident,Virginia State University

Joe LeePresident,Parks College, Inc.

Virginia LesterPresident,Mary Baldwin College

Kenneth MortimerProfessor and Director,Center for the Study ofHigher Education,The Pennsylvania State University

C. Gail NorrisExecutive Coordinator,Council for Postsecondary EducationState of Washington

Dale ParnellPresident,San Joaquin Delta College

Sharon PenneyAssociate Provost,Yale University

Frank Pesci, Sr.Maryland State Delegate

Ben LawrenceExecutive Director

OFFICERS

Dennis JonesAssociate Director

Stanley SalwakPresident,University of Maine at Presque Isle

Donald SmithPresident,Brookdale Community College

Herman Smith, Jr.Chancellor,University of Arkansas-Pine Bluff

Joyce TsunodaProvost,Kapieani Community Colkge

Richard Van HornVice President for Management,Carnegie-Mellon University

George WeathersbyCommissioner of Higher Education,State of Indiana

Brunetta WolfmanExecutive Planner andDirector of Policy, Planning,and Dwelopment,Massachusetts Department ofEducation

Ex Officio Member:

H. Bradley SagenChairperson,National Advisory CouncilThe United States Military Academy

Gordon ZiemerSecretary/Treasurer and

Associate Director

3

The Higher Education Finance Manual:

The Source/Use Concept

Richard H. AllenDouglas J. Collier

1980

National Center for Higher Education Management SystemsP.O. Drawer P Boulder, Colorado 80302

An Affirmative Action/Equal Opportunity Employer

4

The work upon which this publication is based was performed by NCHEMS pursuant

to Contract No. 300-76-0319Pilot Project for the Installation of Finance Data Bases

at State Levelswith the National center for Education Statistics. It does not, however,necessarily reflect the views of that agency.

National Center for Higher Education Management Systems, Inc.Boulder, Colorado 80302

Printed in the United States of AmericaDesigned by Lynn E. Phillips

5

Contents

Preface vii

Acknowledgments ix

1. Introduction 1

2. The Source/Use Concept 3

Data Categories 4

Dissecting or Expanding Elements 5

Differences in Data Compilation 6

Use of the Concept with Other Fund Groups 6

Summary 7

. The Current Funds Standard Source/Use Matrix 9

Format 11

Attributes 13

Communication with the Standard Source/Use Matrix 14

Analysis with the Standard Source/Use Matrix 16

Limitations 17

4. Implementing the Source/Use Concept 19

Background 19

The Implementation Process at the State Level 20

Institutional Data Compilation 21

General Guidelines 22

Transactional Compilation of the Source/Use Format 25

Estimated Source/Use Information 25

Ad Hoc Source/Use Information 26

vi

Preface

The Higher Education Finance Manual: The Source/Use Concept is the thirdvolume in the revised Higher Education Finance Manual (HEFM) series. Thethree volumes in the series together revise and replace the original single-volumeHigher Education Finance Manual (NCHEMS Technical Report 69). The series isdesigned to be a comprehensive guide for providers and users of financial infor-mation reported by institutions of postsecondary education. The material inthe HEFM revision was developed at NCHEMS as part of the original HigherEducation Finance Manual project (1972-74), supported by the National Centerfor Education Statistics (NCES). It was supplemented and refined in a follow-onproject, the Higher Education Finance Manual /State -Level Technical Assistance(HEFM/SLTA) project, also supported by NCES, which in addition providedtechnical assistance to state agencies seeking to implement.the HEFM guidelines.

The three. volumes in the revision are the Higher Education Finance Manual:Data Providers' Guide, the Higher Education Finance Manual: Data Users' Guide,and the Higher Education Finiince Manual: The Source/Use Concept. The DataProviders' Guide comprehensively describes national financial reporting standards,including those prescribed for the HEGIS reports, and includes the informationneeded to comply with those standards. It includes:

vii

1. A complete set of definitions of expenditure categories and revenue cate-gories endorsed by the National Center for Higher Education ManagementSystems (NCHEMS), the National Association of College and UniversityBusiness Officers (NACUBO), the American Institute of Certified PublicAccountants (AICPA), and NCES

2. An activity look-up table, with specific guidance for assigning activities toexpenditure categories and subcategories, endorsed by NCHEMS andNACUBO

3. A glossary of financial accounting terms4. A description of generally accepted accounting principles for portsecondary

education5. Exemplary formats for financial statements

Oriented to the nonaccountant, the Data Users' Gze:de describes the kinds ofinformation about postsecondary education that can be derived from institutional

financial data. Included are:

1. A description of fund accounting in higher education2. A discussion of the relationship between accounting data and programmatic

financial data3. A guide to the implementation of the HEFM guidelines at the state level

4. A guide to the implementation of the HEFM guidelines at the institutional

level

The Source/Use Concept describes the principles included in presenting finan-

cial information in a format showing where money comes from (sources) and

where it goes (uses). Included are:

1. A general description of the source/use concept2. Suggestions about ways to develop source/use formats for analysis and

communication3. A description of the standard source/use matrix and its uses as a supplementary

financial statement4. A guide to implementation

Portions of the Higher Education Finance Manual series have been reviewed

by NCHEMS staff, the task force of the HEFM/SLTA project, individuals in its

pilot-test states, a network representing the state-level postsecondary-education

finance community, and a joint NCHEMS/NACUBO committee on theguidelines of the Joint Accounting Group. Since much of the material was drawn

from the first edition of HEFM, the HEFM Task Force has reviewed thoseportions of the documents as well.

viii 9

Acknowledgments

The authors are grateful to all those who assisted in the development of this book.We are particularly indebted to James Cofer of the Mississippi Board of Trusteesof the Institutions of Higher Learning and James Elsass of the Illinois Board ofHigher Education for coordinating developmental work on the source/use conceptin their states.

For their assistance in structuring the project, we are grateful to the membersof the HEFM/SLTA Task Force: William Arceneaux, State Higher EducationExecutive Officers ( SHEEO); Carl Blackwell, National Association of. StateBudget Officers; John Felger, Education Commission of the States; John LaFaver,National Conference of State Legislatures; Reuben Lorenz, National Associationof College and University Business Officers; and Jane Ryland, SHEEO/NCES.We would also like to thank Paul Mertins and George Wade, who were NCESproject officers, for their efforts throughout the project, and Frank Schmidtlein,evaluator of the project, for his constructive feedback. We extend special thanksto NCHEMS Associate Directors Mel Orwig and Dennis Jones for their adviceand support.

Mary Sue Waldkirch provided invaluable editorial assistance. Thanks are duealso to Linda Smith, Nula Dressler, and Barbara Epp for their secretarialassistance.

rix

0

10

Introduction

Institutions of postsecondary education regularly generate information to describetheir financial activities and position. As a rule, an institutional accounting systemforms the basis for the kinds of financial information generated, published inannual reports, and provided to funders, the institutional community, and thegeneral public. Institutions commonly use three financial statements: the BalanceSheet, Statement of Changes in Fund Balances, and Statement of Current FundsRevenues, Expenditures, and Other Changes. In addition, many institutionsprepare supplementary financial statements that focus on particular aspects ofinstitutional finances, such as debt service or auxiliary enterprises.

Unfortunately, the fund-accounting principles that must be used in institu-tional accounting systems to ensure fiduciary accountability often produce financialstatements that may easily confuse the administrator, legislator, or member of thepublic not acquainted with the technical aspects of accounting. At the same time,methods of formatting financial information that are not based on fund-accountingprinciples have been criticized on the grounds that they do not accurately portrayinstitutional financial affairs. Thus many institutional business officers are reluc-tant to provide, and institutional and state-level data users are reluctant to accept,financial information not directly derived from an accounting system.

The source /use concept was developed to help resolve this dilemma. Theconcept is employed to present a summary picture of institutional operations andtheir financing that is derived from and linked to the institutional accountingsystem but nonetheless can be understood by nonaccountants. Formats based on

1 11

the source/use concept can be used in displaying the institution's financial opera-

tions as a whole or to analyze specific portions. The standard source/use matrix is

a specific format designed to display institutional current operations. Formatsderiving from the source/use concept relate_types of revenues (sources) to types of

expenditures (uses). These formats make the source/US?-concept distinctly valuable

in analyzing and communicating about institutional finances. As figure 1 illustrates,

the source/use concept shows where money comes from and where it goes in amatrix that displays the intersection of sources of revenue and uses of funds.

FIGURE 1

SOURCEX

SOURCEY

SOURCEZ

USE A

USE B

USE C Z/B*

*Funds from Source Z were used to finance the expenditure fo Use B.

The standard source/use matrix, discussed in section 3 and illustrated on p. 10,

is one of many adaptations of the source/use concept. The matrix displays current-expenditures by source of funds, in terms of the categories and conventions

used in institutional and state financial-reporting systems. The figures in thestandard matrix are generally consistent with those in a Statement of CurrentFunds Revenues, Expenditures, and Other Changes.

The source/use concept was originally explicated in the Higher EducationFinance Manual. As a result of interest expressed at the introductory workshop of

the Higher Education Finance Manual /State -Level Technical Assistance (HEFM/

SLTA) project at NCHEMS, implementation was then established as a priority

for that project. To this end, two of the HEFM/SLTA pilot-test states, Illinoisand Mississippi, were selected to collect financial data in a sowi.ce/use format with

assistance from NCHEMS. This document is based on the experiences of theinstitutions and agencies in those states.

Section 2 describes potential analytical applications and limitations of thesource/use concept. Section 3 examines in detail the application of the standardsource/use matrix as a supplementary financial statement and communication tool.

Section 4 discusses the implementation of the source/use concept; in particular, the

collection, compilation, and formatting of data for the standard source/use matrix.

2

12

2

The Source/Use Concept

The source/use concept should be viewed as a way to format data and, analyzeinstitutional finances, rather than as a specific financial statement. The importantcharacteristic of the source/use concept for data display is that, unlike traditionalfinancial statements in higher education, it shows the relationship between the ex-penditure of institutional monies and the sources of funding for those expenditures.This section will describe some of the ways in which the source/use concept canbe applied to institutional financial data. In fact, the standard HEFM source/usematrix, explained in section 3, should be viewed as one adaptation of the source/useconcept rather than as the way to use it with postsecondary-education financialdata. To describe some of the ways the concept can be applied, this section willdiscuss four topics:

1. How the source and use data categories can be varied2. How the standard source/use matrix can be either dissected or expanded to

meet particular information needs3. How differences in the compilation of the format can result in different

information4. How the concept can be employed with fund groups other than the current

fund

31_3

Data Categories

The source/use concept provides flexibility not found in financial statements

of predetermined form. Therefore a wide variety of expenditure and revenue cate-

gories can be employed in a source/use format. The most common expenditure, or

use, categories are (1) program, or' function, categories (Instruction, Research,Public Service);' (2) organizational-unit categories (Business Office, Admissions

Office; English Department, School of Engineering); and (3) object categories(salaries, travel, equipment). Any one of these three types of expenditure categories

can be included in the use axis of a source/use format. Moreover, while the most

common source categories are those like Tuition and Fees, Grants and Gifts, andState Appropriations,2 other ways of viewing sources of funds will result in a dif-

ferent source dimension. For example, rather than naming the sources of revenues,

one might specify either the nature of the sources (restricted, designated, un-restricted) or the mechanisms for providing the funds (budgeted, unallocated).

In large part, the appropriate type of categories for a source/use format isdetermined by the purpose(s) of the analysis. For example, if the source/use concept

is to aid the planning process, program/function expenditure categories may be

appropriate for the use dimension, since they label the objectives to be accom-

pliShed by a set of activities. On the other hand, if the concept is to be an aid for

managing the institution, either object categories or organizational-unit use cate-

gories may yield more valuable information. While the source categories generally

will identify the funder, other source dimensions may be useful. In an analysis of

financial flexibility, for example, categories to distinguish the degree of restriction

on particular funds may be helpful. For example, funds restricted to financial aid

are more flexible than funds restricted to financial aid for foreign students.

A second factor influencing the choice of data categories is the unit of analysis.

When. the institution is the unit of analysis, the conventional revenue sources

(Tuition and Fees, State Appropriations, Gifts and Grants) are probably the most

appropriate type of source categories, because they identify funders. Similarly, at

the institutional level, functional or organizational-unit expenditure categories may

be the best type of use categories. If the unit of analysis is an academic department

or administrative unit, source categories that describe the constraints on the use of

monies (restricted vs. unrestricted, appropriated vs. nonappropriated, budgeted vs.

nonbudgeted, contracted vs. noncontracted) will often be most valuable. Users can

also develop source categories to describe both provider and constraints at once.

(In particular, the standard HEFM source/use matrix employs source categories

that combine restricted vs. unrestricted distinctions with provider distinctions.)Figure 2 illustrates one design for a source/use format to aid management when

the unit of analysis is a departmental or organizational unit. This format not only

I. This type of expenditure category is employed in the standard HEFM source/use matrix described in section 3.

2. The same revenue categories are used in the standard HEFM source/use matrix described in section 3.

4 14

FIGURE 2

-.".011RCE

USE -''''"-.....,

InstitutionallyBudgeted

Funds

GovernmentGrants andContracts

Private Gifts,Grants, and

ContractsDepartmental

Sales Other Total

FacultyCompensation

OtherCompensations

Supplies andServices

Equipment

Other

Total

helps department chairpersons to communicate financial matters to the facultyand administration but also allows them to analyze the impact of certain sourcesof funds on the department's ability to pay salaries, buy equipment, and so forth.

Dissecting or Expanding Elements

By focusing on the elements within a source/use format (such as the standardsource/use matrix described in section 3), one can examine in detail the standardsource or use categories or the relationship between them. These elements are therows, displaying use categories; the columns, displaying source categories; andthe cells, displaying the relationship between a particular source and a particularuse. Focusing on a row allows one to view the full range of sources supporting aparticular expenditure. For example, if federal grants and contracts are the majorsource of support for the research program, the administration may want to furtherinvestigate the sources of support listed in the source/use format to answer suchquestions as these:

How stable and certain is that source of support in the future?If that support ceases, how will the institution be affected (for example, aretenured faculty supported by it)?Might other support for research increase in the future? Or decrease?

One might also want to examine a particular source column in a source/useformat in more detail. For example, it may be useful to focus solely on a FederalGrants and Contracts column to determine the activities the contracts are support-ing and the relative importance of these activities to the institution.

5 15

A source/use format can be dissected so that a single cell is the focal element.

For example, by isolating and collecting detailed data fora cell showing tir relation-

ship between Endowment Income and Scholarships and Fellowships only, one can

understand in depth how particular endowments support particular scholarships.

Such use of a source/use format is particularly valuable to the governing-board

member or legislator, who, so often inundated with detailed data, has difficulty

seeing the big picture. It provides an additional level of detail in areas of particular

interest without requiring a great deal of detail in areas of lesser interest. Using this

dissection method, the data provider can supply an aggregate point of view with a

more general statement that provides necessary data without a great deal of effort

but can also focus on a particular area.

Differences in Data Compilation

When considering methods of compilation, one can view a source/use format

as a way of tracing Current Fund revenues to their uses or as a way of relating

expenditures back to their sources of support. While this may appear to be asemantic distinction, it often reflects real differences in how one would compile

the data. (That is, does one go to the expenditure accounting system to identify

the sources that supported those expenditures, or does one look at the sources of

revenues to identify the activities supported by each source?) Moreover, it often

reflects differences in the purpose of the source/use concept. For example, for

institutions concerned about managing their funds and cultivating new sources, the

concept is useful for determining how the funds from each source are used. On the

other hand, for institutions more concerned about "supporting their programs,"

the concept helps them determine the source of support for each program. Section 3

offers a more detailed discussion of how differences in compilation affect thedevelopment and application of the standard HEFM source/use matrix.

Use of the Concept with Other Fund Groups

To this point, discussion has centered on application of the source/use concept

to the Current Funds group (those revenues and expenditures related to the insti-

tution's current operations). However, the concept can be equally valuable for

analyzing and communicating about the source /;;se relationship for other fund

groups. The Plant Fund exemplifies this particularly well. Like the Current Fund,

the Plant Fund contains both restricted and unrestricted sources. Therefore one

can develop a source/use format for the Plant Fund, tracing unrestricted funds to

their uses or, conversely, tracing restricted uses to their source of support. Figure 3

shows one source/use format that can be used for the Plant Fund.

6 16

FIG

UNRESTRICTED RESTRICTED

PLANTFUND

DesignatedFunds

Private Gifts,Grants, andContracts

EndowmentIncome

GovernmentGrants andContracts Other

Debt Retirement. -Interest

Debt RetirementPrincipal

Major Repairs andRenovations

New PlantExpansion

New Buildings

CapitalEquipment

Summary

Whenever better knowledge of the relitionship between expenditures andsources of funding would enhance a decision, some version of a source/use formatwill probably aid the decisionmaker. The discussion in this section was primarilyintended to show how the source/use format can be adapted to particular uses. Itshould not be considered an exhaustive treatment of the applications of thesource/use concept.

7

1 7

3

The Current Funds StandardSource/Use Matrix

The standard source/use matrix, as defined in the Introduction, is intended to beused as a supplementary financial statement and general-purpose communicationtool for describing current-fund operations. As a supplementary financial statement,it expands the Statement of Current Funds Revenues, Expenditures, and OtherChanges by relating particular sources of funds to particular uses. In an accountingsense, it is a statement of current-funds expenditures by source of funds. (Section 4discusses in detail the derivation of financial data of this type.) As a general-purposecommunication tool, it provides a one-page summary of current institutionalfinancial affairs that is intelligible to those without an accounting background.

The standard source/use matrix shows unrestricted expenditures (stateappropriations, student fees) as a single revenue pool. The pool as a whole isallocated for use (HEFM expenditure categories). (Alternatively, two pools,Undesignated and Designated, may be used to separately show specific funddesignations by the board of control.) Restricted funds are displayed by source(revenue type) and use (expenditure categories). Information about the relationshipbetween the individual sources of funding and the uses of restricted funds is par-ticularly important in planning and management, because funds whose uses havebeen determined by a donor are outside the control of institutional management.To allocate resources wisely, management should know as much as possible aboutsuch restrictions. The standard source/use matrix provides this type of informationto both institutional administrators and state-level planners.

9

FIGURE 4

CURRENT FUNDS STANDARD SOURCIlillSE MATRIX

Year Ended

Sample Educational Institution

Source of Funds

Use of Funds

(in thousands)

Unrestricted Funds

(all revenue

sources*) Restricted Funds

Undesig

nated Designated

Governmental

Appropriations

Governmental

Grants

and Contracts

Private

Gifts

Grants, and

Contracts

Endowment

Income

Inde.

pendent

Oper.

ations

Other

Sources

Transfers

InFederal State Local Federal State Local

71,

G

l.';u

2m

7,

C.

v1:;

Instruction

(I) (2) (3) (4) (5) (6) (7) (8) (9) (10) (II) (12) (13)

2,350 610 280 209

Research 100 375 25

Public Service 110 20 25

Academic Support 250

Student Services 140 60

Institutional Support 450

Operation and

Maintenance of Plant220

Scholarships and

Fellowships

5 85

. ,

100

Mandatory Transfers 192 320

Nonmandatory Transfers _

TotalEducational

and General

3,717 1,195 375 25 25 380 209

Auxiliary Enterprises 1,830

Hospitals

Independent Operations

Total funds used

(by source)

3,717 3,025

_

375 25 25 380 209

'Unrestricted revenues may include student fees; federal, state, and local appropriations; federal, state, and local grants and contracts; private gifts, grants, and contracts;

endowment income; sales and services of auxiliary enterprises and hospitals; independent operations; other sources; and transfers in,

Total Funds

Used

(by function)

(14)

3,449

500

155

250

200

450

220

190

512

5,926

1,830

7,756

20

Format

The standard source/use matrix follows the same approach as a more general-ized source/use format. The approach is, however, a good deal more formal (seefigure 4). The uses of funds in the format described here are expressed in terms ofthe standard HEFM major expenditure categories: Instruction, Research, PublicService, Academic Support, Student Services, Institutional Support, Operationand Maintenance of Plant, Scholarships and Fellowships, Mandatory Transfers,Nonmandatory Transfers, Auxiliary Enterprises, Hospitals, and IndependentOperations. The sources of funds are defined, for restricted funds, in terms of thestandard HEFM revenue categories: Federal, State, and Local GovernmentalAppropriations; Federal, State, and Local Grants and Contracts; Private Gifts,Grants, and Contracts; Endowment Income; Independent Operations; OtherSources; and Transfers In. The unrestricted funds-Orthe institution are shown asa pool of income (or alternatively, two pools:` one for designated funds and one forundesignated funds) and distributed to the various uses made of funds in thispool. While the conventions and categories described here and in the remainder of

this section are those of HEFM, it is possible to develop a standard source/usematrix that employs adaptations of the HEFM guidelines. WIrm an institutionor state agency adapts the HEFM guidelines to meet particular local needs, thestandard source/use matrix should also reflect these adaptations. For example,if a state or institution preferS--'-fo separate Libraries from the rest of AcademicSupport for reporting services, Libraries should be identified as a use of funds inthe standard source/use matrix.

The distinction between unrestricted (both designated and undesignated) andrestricted funds is a key point. Restricted funds are those funds legally restrictedto a particular purpose by a funder external to the institution. Unrestricted fundsare those that the institution has discretionary authority to spend for any purpose.Designated funds are those unrestricted funds that the governing board assigns toa particular purpose. Undesignated funds are those that the institutional manage-ment can assign to various purposes.

Since unrestricted, undesignated revenues (those whose use is not specifiedby an external funder or the institutional governing board), such as state appro-priations and student fees, are not limited to a particular use, generally acceptedaccounting principles pool the resources to support the general operations of aninstitution. This practice makes it impossible to say which unrestricted, undesig-nated revenue source supports a given use, such as Instruction or Student Services.Such support can only be accounted for by an arbitrary allocation of funds. Accord-ingly, unrestricted, undesignated funds are shown as an undifferentiated pool ofresources applied to various uses (fig. 4, col. 1).

For designated, unrestricted funds (those whose use is specified by the institu-tional governing board), institutional management must maintain informationshowing compliance with governing-board designations. In many cases, this

21

allows the sources and uses of designated funds to be shown. For example, if an in-

st;.tution received an unrestricted gift, the board might designate this revenue forscholarships. The source would then be Private Gifts, Grants, and Contracts, and

the use would be Scholarships and Fellowships. Since management maintains

records to show that the designation was complied with, the base data to create asource/use matrix for designated funds would be available. However, not all

designated funds fit this description. For instance, a board could designate an

unrestricted, undesignated ending-fund balance for building library collections. In

this case, the source of revenue would be only the unrestricted, undesignated fundpool. It would be impossible to say whether the funds were student fees, state ap-

propriations, or other. For this reason, designated, unrestricted funds are alsoshown as an undifferentiated pool of resources applied to various uses (fig. 4, col. 2).

Restricted funds (those whose use is specified by a funder external to the insti-

tution) require that each individual revenue (source of funds) be spent for the use

to which it is restricted. The source and use categories in the standard source/usematrix represent aggregations of the types of sources and uses. For example, aDepartment of Energy grant to develop-solar-heating technology would be included

under the source Federal Grants and Contracts and under the use Research.

Columns 3 to 13 in figure 4 show the potential sources of restricted revenuesapplied to the various uses of funds. It is important to note that although the typesof revenue sources identified in columns 3 to 13 may be unrestricted as well, thefigures in those columns reflect only the restricted revenues of this type. Forexample, since most state-government appropriations are considered unrestricted,they would not appear in column 4 but rather in the unrestricted, undesignatedfunds pool (col. 1). Since this can cause confusion among users of the matrix, the

three governmental-appropriations revenue categories in the restricted-fund area(columns 3 to 5) may be dropped if all appropriations are considered unrestricted.

To further alleviate confusion, a footnote specifying the sources of funds for theunrestricted-fund pool is recommended as shown in figure 4. In addition, several

of the HEFM revenue categoriesTuition and Fees, Sales and Services of Educa-

tional Departments, Sales and Services of Auxiliary Enterprises, and Sales andServices of Hospitalsare already excluded from the restricted-funds portion of

the standard source/use matrix displayed in figure 4. It would be very unusual for

any of those revenue sources to be restricted current funds. However, if there arerestricted revenues of this type, they may be included in the Other Sourcescategories. If restricted revenues of this type are material, a column may be added

to the matrix.The bottom row and column 14 of the standard source/use matrix shown in

figure 4 show the total revenues, of the institution by source and the total expendi-

tures of the institution by use. These figures should generally correspond to theStatement of Current Funds, Revenues, Expenditures, and Other Changes. Infigure 4, revenues and expenditures in the illustrated year are equal. But this is not

always the case. Since the standard source/use matrix is a statement of expenditures

12 22

by source of funds (rather than a statement of revenues by use), only revenuesexpended in the current year should be shown. (That is, revenues used to increasefund balances should not be shown except as a footnote.) In the opposite case,where unrestricted expenditures are made possible only by drawing down un-restricted current-fund balances, such drawdowns should be included in therevenue totals for unrestricted funds and footnoted as such. The suggested footnoteformat is: "This source of funds includes $ of reductions in fund balances."In those cases, of course, the standard source/use matrix will differ from theStatement of Current Funds Revenues, Expenditures, and Other Changes. Thisquestion will not arise in the restricted current funds, since under the principlesof accrual accounting a revenue will be recorded only when an expenditure ismade The use of reductions in fund balances in other fund groups, such as theEndowment and Similar Funds, to support current-fund unrestricted expendituresshould be reported as a Transfer In (col. 13), according to the definitions of theHEF:A4 revenue category.

Attributes

The standard source/use matrix can be used as a tool for communicating withstate agencies (postsecondary-education agencies, budget bureaus, special studycommissions), legislators and their staffs, governing and coordinating boards,donors and potential donors, members of the academic community, and otherinterested parties. The standard source/use matrix is valuable for this purposebecause of its summary nature, intuitive format, and links to auditable financial data.

The summary nature of the standard source/use matrix is valuable for holdingdown the volume of information while still focusing on key financial variables.Rather than displaying the great detail of fund accounting necessary to fulfillfiduciary responsibilities, the standard source/use matrix uses aggregations of fundsources and functional uses consistent with the principles of fund accounting.This allows for a single-page summary of institutional current-fund operations,which is more likely to be read and understood by those not versed in accountingprinciples than is a multipage financial report.

The intuitive format of the standard source/use matrix is very important forcommunicating with those unfamiliar with accounting practices. While few exceptaccountants have the background, inclination, or time to obtain an overall pictureof institutional current-fund operations from a traditional financial statement basedon fund-accounting principles, nonaccountants will find information presented ina standard source/use matrix much easier to understand and use. The standardizedsource and use categories (the revenue and expenditure categories) are widely usedand are defined in numerous documents, such as The Higher Education FinanceManual: Data Providers' Guide, the NACUBO College and University BusinessAdministration-1974, the AICPA Audit Guide, the Higher Education General

13

Information Survey (HEGIS) reports, and many state and institutional data-collection systems. The functional expenditure categories are the familiar classifi-

cations of higher-education programs, such as Instruction, Research, and PublicService. The ability to look at the uses of individual sources of revenue or at the

sources of funding for particular programs is evident from the format. As a rule,some explanation is required to impress upon nonaccountants why unrestrictedrevenues must be put in a pool before expenditures can be reported. Although anyallocation of a particular unrestricted revenue to a particular use is essentiallyarbitrary, administrators commonly hear questions like "what did you spend the

student fees on?" In addition, the focus of the standard source/Ise matrix on

restricted funds will need explanation.The linking of financial data in the standard source/use format to auditable

financial statements is another important attribute of the standard source/use

matrix. The matrix uses the same categories of revenue and expenditures and the

same definitions of restrictions that are incorporated into the conventionalauditable financial statements. While the matrix is not necessarily an auditablestatement itself(although it can be) and is not a substitute for the generally acceptedauditable statements, it can be linked to an audit trail by the use of common

definitions. This gives the source/use matrix a generally higher level of credibility

than accrues to ad hoc financial information.

Communication with the Standard Source /Use Matrix

These three attributes of the standard source/use matrixsummary nature,intuitive format, and links to auditable financial dataaliow institutions and state

postsecondary-education agencies to use it for communicating with several

audiences.A public institution often provides financial information to various state agencies

and legislators as an integral part of the state appropriations process. During theappropriations process, the state generally deals with a subset of the total institu-tional revenues. One typical pattern of states is to appropriate the unrestrictededucational and general revenues of an institution (appropriations, student fees).Another is to appropriate only funds originating in the state treasury. It is unusual

for a state appropriations process to address auxiliary enterprises and even more

unusual for restricted funds to be appropriated. Since the state only appropriates

part of the institutional funds, it often collects financial data for only part of insti-tutional operations. Awareness that large segments of institutional finances areoutside their purview, coupled with lack of understanding of institutional financial

statements, can lead some to suspect that all nonappropriated Rinds constitute a

large pool of discretionary funds. Although this is demonstrably untrue, it has infact not been demonstrated to some state legislators and state-agency staff (par-

ticularly in those agencies not dealing specifically with higher education).

14 2 4

The standard source/use matrix, used as a communication tool, can addressthis problem. By providing a summary overview of institutional current operations,with budgeted funds as a clearly identified subset of all revenues, a statepostsecondary-education agency or institution can identify the allocations toprogram areas of various appropriated and nonappropriated revenue sources,demonstrate that the funds are used for important purposes related to the missionsof the institution, and explain the relationships among the different sources offunds. .

The summary nature and intuitive format of the matrix allow state-agencystaffs (especially those outside the postsecondary-education sector) and legislatorsto absorb the information in the limited time available to them. At the same time,the linking of data in the standard source/use matrix to auditable financial datamakes this format more creditable with state-level officials and agency staff thanother summary statements of institutional finances. A related benefit is that topmanagement of institutions and state postsecondary-education agencies will feelmore comfortable explaining data to legislators or other state agencies with thestandard source/use matrix than with the more complicated auditable financialstatements. Moreover, they can better demonstrate the interrelationships betweensources of revenue and uses of funds without resorting to accounting conceptslikely to be poorly understood by both the speaker and the audience.

Governing and coordinating boards are another potential audience for financialinformation in the standard source/use matrix. These boards are typically com-posed of members with substantial obligations outside the postsecondary-educationcommunity and limited time for their board responsibilities. Much of this time istaken up with important nonfinancial matters. A summary of institutional financescan help both institutional and state-level boards put financial information in anoverall institutional context. For instance, if an institution had received anunrestricted gift for which the board must determine a use, it would be helpful toknow the program areas to which other gifts had been applied, in order to avoidconcentrating one-time revenue in a single program area. State-level boardmembers typically have the same information needs as legislators. Thus a summaryof those areas of institutional finance outside the general scope of the statebudgetary process will prove helpful to them as well.

Due to its intuitive format, the standard source/use matrix is an effective wayof resolving a common complaint of governing and coordinating boards: they donot really understand the financial statements. At the same time, the matrix willnot mask the fiduciary responsibilities of fund accounting.

Another potential use for the standard source/use matrix is in relationships of.

institutions with donors or potential donors. As figure 5 shows, donors often wantto designate their gifts for a particular purpose. The ideas that donors have aboutuses for their gifts tend to duplicate each other. For instance, intercollegiateathletics and financial aid are common uses of gift funds, in spite of the fact thatan institution may have higher priorities for the use of additional funds. A standard

15

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source/use matrix can help persuade donors to designate their gifts for purposesconsidered by the institution to have a high priority. For instance, institutionalrepresentatives can demonstrate to a donor that while the financial-aid functionhas significant resources and multiple sources of funding, research has limitedresources and few available sources of discretionary funding. On this basis, thedonor may be persuaded to allocate a gift to fund released time for faculty research.Few donors want to be involved in a detailed discussion of institutional finances.But if they are to be convinced to assign their gifts to a particular area, they will

need to understand the reasons why the area is an institutional priority. Thestandard source/use matrix offers substantial advantages in this context by providing

a one-page, easily understood summary of institutional finances.Members of the academic community (students, faculty, and staff) and the

general public often have an extremely limited understanding of institutionalfinancial affairs. This lack of understanding may be partially responsible for someof the controversy regarding such items as pay and benefit packages, tuition rates,local tax levies (for community colleges), and so on. While a fuller understandingof institutional finances will not eliminate such issues, it will assist institutionalrepresentatives, state-agency staff, and state and local elected officials in focusingon the issues instead of spending their time clearing 4-Confusion. Conventionalfinancial statements have not accomplished this function very well. The standardsource/use matrix can aid the communication efforts of institutions or state agencieswith audiences having limited time and inclination to study financial statements.Again, the summary nature, intuitive format, and links to auditable financial dataof the matrix may prove to be assets in addressing these audiences.

Analysis with the Standard SourceNise Matrix

While most of the applications of the standard source/use matrix involve com-municating with various audiences, analytic uses should not be overlooked. It canbe used by an institution as an early-warning system. By identifying the program

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areas funded on soft money, the matrix points toward program areas in which theinstitution should be developing contingency plans for the loss of funding. Forexample, a number of institutions were left with unfunded, but highly paid andtenured, health-sciences faculty when the federal subsidies for some instructionprograms were ended, thereby precipitating a crisis. Top institutional manage-ment reviewing a standard source/use matrix would have had their attentionfocused on the fact that a great deal of soft money was being used for instructionand may have encouraged development of contingency plans. Traditional financialstatements did not fill this role, because the information was included within amass of detail about restricted funds.

The application of the standard source/use matrix as an early-warning systemis important at the state level as well. States are often called upon to absorb thecosts of soft-money programs (especially in the instruction area) when outsidefunding runs out. Cooperative contingency planning between the institutioninvolved and the state is likely to ease the transition and encourage more considereddecisions about program continuation or phase-out.

Another major analytical application of the standard source/use matrix at thestate level is for summary financial and program planning and budgeting. Thisincludes consideration of issues such as the role of the state relative to other fundersin financing postsecondary education; long-range budget projections; the mission,role, and scope of various institutions within a state system; and general consider-ation of program-area budgets for the current year. It does not include the kind ofdetailed budget development undertaken in some states, review of specific programsby state agencies, or day-to-day management of institutions by states with statewidegoverning boards. The standard source/use matrix provides summary data onlyand is not sufficiently discriminating to deal with those issues.

Limitations

Although the standard source/use matrix is a valuable tool for communicationand analysis, it has several limitations, summarized below:

The matrix is not a substitute for the conventional financial statementsit is a supplemental financial statement. In order to comply with generallyaccepted accounting principles, an institution must continue to generate theBalance Sheet, the Statement of Changes in Fund Balances, and the State-ment of Current Funds Expenditures, Revenues, and Other Changes. Thisis true even if an institution follows accounting procedures designed tomake the matrix itself auditable.The matrix tends to focus attention on the Current Fund of the institutionand to divert attention from other fund groups. This is particularly true if itis used, as suggested, as a summary of institutional operations. It must be

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made clear to interested parties that noncurrent funds form a vital part ofinstitutional finances. Those wishing to see the standard source/use matrixas a tool for understanding higher-education finance will have to learn touse the Statement of Changes in Fund Balances for the noncurrent funds inconjunction with the source/use matrix to get an overview of all institutionalfinances.The matrix is best suited for the collection of summary data, as displayed infigure 4. An attempt to collect source/use data in greater detail, for example,at the subcategory or discipline level, will greatly multiply the workload.However, this does not preclude the generatiOn of detailed source/use dataon an ad hoc basis to support a particular analysis.The matrix is not capable of distinguishing uses among different kinds ofunrestricted revenues unless there is a very detailed budgetary control systemfor each source of funds, as in a few state-level accounting systems. Theexistence of such a system would raise questions about how unrestricted therevenue really is. In this respect, the standard source/use matrix has thesame limitations as any commonly used postsecondary-education financial

statement.

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Implementing the Source/Use Concept

Background

Although presenting financial information in a source/use format can benefit thedata users, it will involve some effort by data providers. While the definitions andaccounting procedures necessary to develop a standard source/use matrix are con-sistent with those used in developing the conventional Statement of Current FundsRevenues, Expenditures, and Other Changes, the final format looks considerablydifferent. Moreover, the format requires additional information to show the rela-tionship between sources-and uses. Thus an agency or institution that collects orcompiles financial information in a source/use format should give careful attentionto the implementation process. Before the data are collected, both users and pro-viders must clearly understand what information is wanted and in what format,and how it should be provided.

This chapter is based mainly on the pilot-test experiences in Illinois andMississippi, pilot-test states of the Higher Education Finance Manual /State -LevelTechnical Assistance (HEFM /SLTA) project. As a part of their project activities,the cooperating state agencies in these two very different states tried using astandard source/use matrix in their regular collection of financial information.Agencies in several other states, including Kentucky, South Carolina, New Jersey,and Pennsylvania, have used a standard HEFM source/use matrix as part of theirreporting formats, and Maryland (also a HEFM/SLTA pilot state) is developing a

nonstandardized source/use format. The degree of institutional-implementation,beyond the states mentioned above, is unknown.

In large part, the standard source/use matrix will form the basis for thisdiscussion, since it provides a concrete implementation objective. As presented

here, the matrix conforms to the conventions of HEFM. However, institutionsand agencies may need to adapt the matrix to follow their own financial-reporting

systems in order to put all financial reports on a comparable basis and to avoid

a dual reporting structure. The section first describes a state-level process forimplementing the standard source/use matrix, with emphasis on the relationship

between state agencies and institutions. It then examines the methods used in the

institutional compilation of the standard source/use matrix, and finally, considers

the compilation of ad hoc source/use information.

The Implementation Process at the State Level

Although the data used in the standard source/use matrix will normally be

generated by institutions, a state-level process will usually be required to coordinate

institutional efforts, consistently interpret guidelines, and define the needs ofstate-level data users. One approach to the state-level implementation process is

outlined below. Though not the only approach, it does emphasize important

issues that should be considered during implementation.In general, the most successful state-level implementation processes have

emphasized the importance of establishing a cooperative framework among the

state agency and institutions. There is a firm basis for institutional cooperationwith the state, since the standard source/use matrix has perhaps as many useswithin the institution as it does at the state level. It is valuable to formalize this

cooperative effort by establishing an implementation group composed of represen-

tatives from each institution (or from each institutional sector) and from the various

interested state agencies. if a standing group of institutional representatives oriented

toward financial matters does not exist, it is recommended that the chief executive

officer of each institution be asked to designate a representative. In this way, the

chief executive will ensure the selection of an appropriate person and will have

the opportunity to be apprised of the pUrpose of the effort.It is often desirable for the implementation group to devote their first meeting

to discussing the concepts and uses of the standard source/use matrix at both the

state and institutional levels. Since institutional representatives will probably be

business officers or chief accountants, it is worthwhile to emphasize the value of

the matrix in communicating with nonaccountants and to encourage its use for

that purpose. At the same time, it is particularly important for the state agency to

outline exactly what uses it intends to make of the data collected for the matrix

and to explain why these needs cannot be easily met by more conventional forms of

financial reports. For example, a state agency may wish to use an all-current-funds

summary of institutional operations in a standard source/use matrix to support anexisting reporting system focused only on state appropriations.

At this first meeting, participants will also wish to consider the design of thebasic format. Although the standard HEFM source/use matrix displayed in figure 4can be used as a prototype, it will often need to be modified. For example, a statemay use revenue and expenditure categories different from those illustrated infigure 4 or consider different types of revenues to be restricted (and therefore to bedisplayed in the restricted segment of the matrix). This discussion of the basicformat is also useful for resolving any problems or concerns. Many times, morefundamental concerns will arise when the participants are confronted with aconcrete example of what is to be done with the source/use format.

In some instances, basic concepts and formats can be determined in the contextof regular contacts between agencies and institutions. If institutions and agencieshave cooperated extensively in providing and using data, the agency itself mayprefer to design the basic format, consulting with the institutions informally.Even in this case, however, it is recommended that the agency provide writtenmaterial to institutional representatives, especially on the subject of intra-institutional use of financial information in a standard source/use matrix.

After the standard source/use matrix has been discussed with the institutionsand background information has been provided, financial data can be compiledfor the matrix. It is often useful to develop a standard source/use matrix on a trialbasis, with the understanding that the information will not be used in decision-making in the first year. This approach has the advantage of training institutionalagency personnel and uncovering any shortcomings in the format, implementationprocedures, or data. It also can reassure institutions that information in an unfamiliarformat will not be used at the state level until the institutions themselves becomefamiliar with it.

Once trial reports have been produced, institutions and agencies often willfind a formal review process helpful to discuss uses, formats, and compilation pro -cedures. Although. direct contact between an agency and a single institution maybe useful in this context, it is generally more valuable to have several institutionssimultaneously deal with these issues. A meeting involving several institutionswill bring out different perspectives on source /use: information and will providethe opportunity for each institution to explain its point of view. Such a reviewalso guards against polarization of the agency and institution. After the review,both the format and the compilation procedures can be appropriately revised.

Institutional Data Compilation

Although a state agency could compile institutional data in a source/usematrix, the greater familiarity of institutional personnel with their own chartsof accounts generally makes institutional compilation easier and more accurate.

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Thus institutional efforts and processes are described here. In compiling data fora standard source/use matrix itself, an agency would follow the same generalguidelines, although it would probably require a very detailed financial statementand would have to communicate extensively with institutions.

Two basic aspects of institutional compilation of financial data in a standardsource/use matrix will be discussed. First, general guidelines for extracting thestandard source/use matrix for institutional accounting records will be described.Then two separate methods for compiling the information necessary for thematrixthe transactional method and the estimated methodwill be explained.

GENERAL GUIDELINES

The standard source/use matrix is a display of current-funds expenditures bysource of funds. While other configurations of a source/use format are possible(for example, a display of the sources of furls by their use, as noted in section 2),the standard source/use matrix focuses on expenditures. Numbers are generatedin the matrix by assigning expenditure accounts to source and use categories.Most of the guidelines for extracting source/use information from institutionalaccounting records are derived from this method.

1. Unrestricted and restricted expenditure accounts are handled separately.Within the unrestricted accounts, designated and undesignated expendituresare identified separately (if the institution desires such a breakdown). Sincefund-accounting practice in higher education normally requires fiduciarycontrols on restricted and designated funds, an institution usually establishesat least one expenditure account (cost center) for each restriction or designa-tion category. For example, one such restricted expenditure account mightbe entitled "Hypertension Research (NIH Grant # )" and identifiedwithin the Department of Internal Medicine for management purposes.In addition, institutions establish a variety of accounts (cost centers) forexpenditures of unrestricted funds. These accounts can be used to constructthe standard source/use matrix.

2. Each unrestricted, undesignated expenditure account can be assigned to afunction, such as Instruction, Research, Public Service, and placed in theappropriate cell of column 1 in figure 4. For those institutions that haveorganized their financial reports to conform to HEFM guidelines, this columncan be taken directly from the Statement of Current Funds, Revenues,Expenditures, and Other Changes. Institutions that organize their reports insome other way will have to "crosswalk" data in the institutional expenditurecav:gories to the HEFM categories used in the standard source/use matrix.If the two methods of organization are similar, one may use figures from theStatement of Current Funds, Revenues, Expenditures, and Other Changeswith minor adjustments. If they are radically different (for example, an

institutional reporting structure based on major organization units, such asa College of Arts and Sciences), one may have to consider separately eachunrestricted, undesignated expenditure account and assign it to a categoryto conform with HEFM guidelines. Information sufficient to perform thisfunction may be found in The Higher Education Finance Manual: DataProviders' Guide.

3. The procedure for unrestricted Undesignated Funds should be followed forUnrestricted, Designated Funds (see column 2 in figure 4) as well. Again,each expenditure account should be assigned to a source and a use category.And again, the Statement of Current Funds, Revenues, Expenditures, andOther Changes can be used as the basic resource document. Of course,Designated Funds should be dealt with separately from UndesignatedFunds.

4. For restricted funds, the standard source/use matrix requires informationon the relationships among revenue sources and expenditures often notexplicit in an institution's accounting records. Institutions can compile thisinformation using worksheets like those illustrated in figure 6. Essentially,each worksheet is a column in the standard source/use matrix, with room formultiple entries for each cell. One worksheet will be required for eachrestricted-funds column of the matrix (see columns 3 to 13 in figure 4).

Using a set of these worksheets, oilc can assign each restricted-fundexpenditure account to a particular cell, entering either its account numberor a dollar amount.

The source of funds for each restricted expenditure account can oftenbe determined by looking at the fund. If an institution is complying withand accounting for its restriction categories in the standard fund-accountingway, most restricted funds will be separately identified in the accountingsystem. One difficulty might arise if an institution combines two differentsources of revenue with the same restriction in the same expenditure account.For example, an institution could have both gifts and endowment incomerestricted to providing undergraduate scholarships. In such a case, expendi-tures should be allocated between the two sources. Often the revenueaccounting system can provide a useful supplementary source of informationfor this purpose. From the revenue accounting system, one can estimate theproportion of restricted funds received from each source and allocate ex-penditures from this estimate. This kind of estimation is not necessary ifsource/use information is compiled on a transactional basis.

Like the source of funds, the use of funds can usually be determined byexamining the fund structure. However, such a determination may becomplicated by funds restricted to purposes that do not conform to the usecategories of the standard source/use matrix (the HEFM functional expendi-ture categories). For example, an institution may have endowment incomerestricted to the law school. Within the law school, however, the funds may

FIGURE 6

STANDARD SOURCE/USE MATRIX WORKSHEET

Source of Funds/Revenue Category(Endowment Income)

Use/Expenditure CategoryDollars orExpenditure Account Codes

InstructionResearchPublic ServiceAcademic SupportStudent ServicesInstitutional SupportOperation and Maintenance of PlantScholarships and FellowshipsMandatory TransfersAuxiliary EnterprisesHospitalsIndependent Operations

be spent on instruction, public service, libraries, or other functions. If therestricted expenditure accounts are only identified as Law SchoolRestrictedEndowment Income, one must determine the appropriate functional expend-iture categories (uses) to which this expenditure account should be assigned.

Once each restricted-funds expenditure account has been assigned to asource/use category on the worksheets, the totals for each cell can be enteredin the standard source/use matrix. Alternatively, the account numbers canbe used to form the basis of an automated, transactional derivation of astandard source/use matrix.

5. When the cells of the standard source/use matrix have been completed, thetotals can be computed by adding across and down. The last column (see

column 14 in figure 4) should be identical to the expenditures reported byfunction in the Statement of Current Funds Revenues, Expenditures, andOther Changes. However, the bottom line of the standard source/use matrixwill not necessarily be identical to the summary of revenues by source in-

cluded in the Statement of Current Funds Revenues, Expenditures, andOther Changes, since only those revenues spent and thereby reported in anexpenditure account will be recorded in the process outlined above. Thiswill not affect restricted funds since, according to the principles of accrualaccounting, restricted revenues must be earned (expended in accord with

the restrictions) before they are reported. An identity between restrictedrevenues and expenditures is thereby ensured. However, unrestrictedrevenues may be used to build up unrestricted current-fund balances. Sincethese revenues would not be expended, they would never appear in a standard

source/use matrix except in the recommended footnote (see section 3). On

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the other hand, some funds applied to uses identified in the unrestrictedexpenditure accounts will not have a readily identifiable source (the institutionum.. not draw down unrestricted fund balances to allow expenditures to exceedrevenues). This financial operation should also be footnoted (see section 3).

TRANSACTIONAL COMPILATION OF THE SOURCE/USE FORMAT

Source/use information can be derived directly from the institutional account-ing system to permit a direct audit trail back to the accounting system. Such audit-ability can be insured by using a transaction-based compilation in the matrix,employing the same guidelines described above. Transactional compilation of thestandard source/use matrix requires a source-cf-funds identifier for each expendi-ture account. This is usually done as a part of a structured fund code; that is,---xxx-- ----, where the xxx code identifies a particular source of funds and therest of the code identifies expenditures by function, organization unit, object, orother. The transactional method eliminates the crossover assignments to sourceand use categories. In the scholarship example described above, the irrtitutionwould be required to maintain separate expenditure accounts for the two revenuesources. However, these could be aggregated in an automated fashion, since theonly point of difference would be the revenue code. In the law-school example,the institution would establish separate expenditure accounts for each function towhich the restricted endowment income would apply. Since the separate accountswould have the same revenue identifier, they could easily be reaggregated if theuser wanted to emphasize the uses of the endowment fund itself.

The major advantage of transactional source/use information is that it permitstimely use of a flexible and highly credible standard source/use matrix withoutcontinuing expenses. The major drawback of this approach is that the start-upcosts are substantial. The redesign of an entire accounting system to meet theconditions outlined above requires substantial resources at the institutional and/orstate levels. This approach is recommended only if a state or institution is alreadyredesigning its accounting system or if it has a system that already meets the criteria.In these cases, the only requirements are the minimal systems work to producethe report and the choice of an account-code structure to provide the necessaryinformation.

ESTIMATED SOURCE/USE INFORMATION

The standard source/use matrix can also be developed without using trans-actional expenditure and revenue data. Essentially, the general guidelines describedabove are followed, but the analysis uses regular expenditure reports (a detailedfinancial statement or internal institutional accounting records). Each account isassigned to a source and use category. While this operation can always be donemanually, a more complex institution may find it worthwhile to develop a simple

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computer program for compiling the expenditure accounts into appropriate source

and use categories.The major advantage of the estimating approach is its relatively low effort

requirements. Experience in institutions that have compiled a standard source/use

matrix indicates that smaller, less complex institutions with limited restricted-fundexpenditures can accomplish the task in 2 to 4 work hours (more for a one-time

learning experience on the first attempt). More complex institutions with asubstantial volume of restricted-fund expenditures may require 20 to 40 workhours to complete the matrix (more for a one-time learning experience). The majordisadvantages of this approach are the expenditure of effort each time a standardsource/use matrix is required, the lack of flexibility, the delay in receiving expend-

iture reports, and the inability to track the reported source/use information back

to audited, transactional expenditure data.

Ad Hoc Source/Use Information

Although it is rather difficult to talk about implementation of ad hoc source/use

information (since it can take so many forms) the same general procedures areapplicable. Ad hoc source/use information, like the standard source/use matrix, is

compatible with higher-education fund accounting, even though a particularsource/use analysis may have a different focus. In general, the more detail andflexibility in an institutional accounting system, the greater capacity that system will

have to produce ad hoc source/use information. Finally, experience in producing astandard source/use matrix will prove to be a valuabl learning tool for developing

ad hoc source/use information.

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